Friday, May 11, 2012

North Dakota's Amazing Economic Success; It's Not Just About Oil, A Pro-Business Climate Gets Credit. Let's Call it the "Dakota Model" of Job Creation

The "Dakota Model"of Economic Development and Job Creation

It's been widely reported here and elsewhere that North Dakota's economy is booming, thanks largely to the energy-related prosperity in the western part of the state. The Peace Garden State's jobless rate is the lowest in the country at 3% for March, more than five percentage points below the national average of 8.1%. Per-capita personal income in North Dakota increased more than 78% since 2000, more than double the 37.4% increase in per-capita income nationally.

The chart above displays monthly payroll employment levels for North Dakota and the U.S. back to January 2000 with both series expressed as indexes equal to 100 in January 2000. Overall employment in North Dakota has been
growing steadily over the last decade, with a sharp acceleration over
the last four years. Even the Great Recession that crippled the
national labor market, barely slowed job creation in North Dakota.
While the national economy is still 3.6% and five million jobs below
December 2007 levels, North Dakota's payrolls are 15% above
pre-recession levels (see chart).

A recent news report highlights the fact that North Dakota's economic success is not only due to oil prosperity, but also because of its pro-business climate and amazingly well-diversified economy, with many booming sectors including manufacturing, tourism, advanced manufacturing, information technology and agriculture. According to North Dakota Commerce Commissioner Alan Anderson, “Oil is just one piece of our economic success and our economy is much bigger and more diverse than ever before.” In fact, the oil industry is responsible for only 25% of the state's revenue collections. Mr. Anderson highlights some of North Dakota's diversified economic success:

1. The state's technology sector has gained national recognition and its information technology job growth has been triple that of the nation. Microsoft and Amazon have both recently expanded in the state. Amazon added a 30,000-square-foot facility that will expand its customer service operations in Grand Forks and create 200 full-time jobs. Microsoft’s Fargo campus is one of the larger Microsoft locations worldwide, and its three buildings house over 1,500 employees, vendors and contingent staff.

2. Manufacturing continues to grow in North Dakota. One example is the recent expansion announcement by Caterpillar in West Fargo. Construction has started on a $50 million project that will create about 250 new jobs during the next three years, nearly doubling the plant’s current workforce. Caterpillar officials told us that North Dakota’s pro-business climate was a major factor in its decision to expand in West Fargo. Phoenix International, a company that manufactures electronics for John Deere, recently broke ground on a $22 million expansion project that will include 90,000 additional square feet in Fargo for an expanded work force. Other industrial expansions include WCCO Belting in Wahpeton, Harris Manufacturing in Oakes, and at the Monsanto and Cargill facilities in the Fargo area. Cargill recently started a $50-million expansion project and Monsanto has completed a $17.5 million expansion that has created 20 new jobs.

3. Tourism is another area that continues to drive North Dakota’s economy as the third-largest contributor to gross state product. The tourism industry growth is visible by looking at the number of new hotels constructed across the state. In the past two years, 21 new hotels have opened, adding 1,474 sleeping rooms in 11 communities. Another 24 hotels are under development and are expected to add another 1,800 rooms by later this year.

MP: It's interesting to know that North Dakota's economic success goes beyond its energy sector. The state's pro-business climate gets some of the credit for the impressive job growth over the last five years. Whatever North Dakota is doing, it's working, and the state should be a nationwide model for economic development and job growth - call it the "Dakota Model" (HT: Eagle Eye, see comments).

You're talking about a "state" of ~ 600,000 people. A state which has very different demographic characteristics to almost every other place in the US, and which has only 2-3 main economic activities; farming and energy. ND farming is the most heavily subsidized place in America. I'm not sure that is a model I want to follow. Energy, of course, is sheer luck. It happened to exist there, they happened to have very few people, so on a per capita bases of course it will look impressive.

"Tourism" can't be measured by the number of hotel rooms. We all know those hotel rooms aren't serving any tourists. Now ND does have a tourist industry...it has the Badlands after all, and there's about 4-5 hotels in total that service that market.

In fact, having driven through ND and having needed to find a hotel room on the highway to sleep at night, I'd guess the real growth in hotel rooms comes as a result of the truck traffic going through the state (it was impossible to find a vacant hotel room at 12am in Dickinson, even though there were probably half a dozen major hotels on the highway. Took me 1 hour to find a room)

Of course, God forbid they should place some tolls on that highway.

So overall I just don't understand what economic "lessons" we are supposed to learn from ND, other than "if you strike gold, you'll be rich". But everyone already knows this.

Meanwhile, the Green River Formationa largely vacant area of mostly federal land that covers the territory where Colorado, Utah and Wyoming come together, contains about as much recoverable oil as all the rest the world’s proven reserves combined, an auditor from the Government Accountability Office told Congress on Thursday." according to GAO testimony .

From the May 10, 2012 GAO report:"Tapping the vast amounts of oil lockedwithin U.S. oil shale formations could go a long way toward satisfying thenation’s future oil demands. Oil shale deposits in the Green River Formationare estimated to contain up to 3 trillion barrels of oil, half of which may berecoverable, which is about equal to the entire world’s proven oil reserves."

The Green River Formation is Not oil; it is Kerogen. Shell, and Chevron (among others) have been trying for decades to figure out how to turn that into usable energy, with a success rate of ezzackly Zero.

Oh, and it's not "shale;" it's marlstone - much harder than shale, and "unfrackable."

the " Uncertainty about viable technologies" on page 9 make it sound like a risky investment that requires significant transportation and electricity infrastructure, lots of water.. deep mining and lots of surface disposal of toxic-laden materials.

Even the existing Federal leases (and private lands) are not currently being developed into economically viable operations.

the only thing that makes it even remotely feasible is the fact that oil is above $100 a barrel and headed higher.

reading through the "challenges" makes me wonder if this stuff will be developed any time soon.

Well, AIG, in fact we don't know that if you strike gold you'll be rich (as a general rule). It depends a great deal on the situation. After all, Alaska has oil but it's on a nature refuge so hands off! So many other countries that are resource-research are materially poor. For a long time, it was quite the puzzle.

Look at PA and NY - PA is extracting their shale oil, and NY isn't.

If ND acted like NY, they would likely have none of this growth they're experiencing.

And, as for tourism, a lot of that is Canadians coming down to shop. Exchange rates are par, but goods prices are much higher still in Canada, so it makes sense to schlep down to Minot and get your shop on.

ND is primarily driven by the shale oil and gas bubble. As the money floods in it makes the residents of the state much richer for as long as the bubble is expanding. When it ends jobs, housing, and tax revenues will crash below the pre-bubble period because malinvestments squeezed out viable business activity in favour of unsustainable higher-profit, bubble related activities.

I saw the commentary below this morning. It rephrases an argument that I have given many times in the past few years but Mark has chosen to ignore. Clearly the inability to see the bubble has nothing to do with intelligence because Mark and many of the optimists here are sufficiently intelligent to understand what is going on. No, the failure to see reality has more to do with emotion and the lack of courage to look at data that contradicts our beliefs and desires.

Note the commentary about the fact that short sellers who get the argument will still be killed when the insiders manage a snap-back rally. This means that the financial players who are making the loans can 'hedge' their positions by gambling on a snap-back. They can sell puts, buy calls, and take part in activities that will guarantee a very nice profit only to dump their positions as the short covering activity explodes. At that point they can make a bet against the company and take advantage of an overvalued stock and lousy management.

The end game only comes when no further financing is possible. By that time the shale bubble will be bursting and even the optimists will be forced to see reality as it is.

Much of the business expansion in North Dakota is taking place in the neighborhood of two cities, Grand Forks and Fargo, both situated across the Red River from Minnesota. Why do you suppose a company would build a plant on the desolate, windswept prairies around Fargo rather than in the cozy environs of nearby Moorhead in contempo-socialist Minnesota?

Valero CEO Bill Klesse told Bloomberg News last week that he is hearing from producers that Eagle Ford production could hit 500,000 barrels per day by the end of the year.

This makes sense. If you look at the link you provided you find that drilling activity has exploded. Given the fact that IP rates are running around 350 bpd we expect to see a huge increase in production. The problem is depletion. Wells that are two years old are likely to be running at less than 100 bpd, which means that you need a lot of drilling activity just to keep production flat. To keep production rising you need even more drilling than you see today and that will create massive stresses on a supply chain that is already straining to keep up.

ND did not "luck out". Other states such as CA are having trouble developing their shale oil and gas because of regulations and politics. In neighboring MN electricity rates are 10.7 cents/kW hour versus 7.6 cents/kW hour in ND because of renewable energy mandates in MN. Overall, ND has created a favorable business environment that includes a reasonable regulatory environment, low energy costs, and low taxes.

ND did not "luck out". Other states such as CA are having trouble developing their shale oil and gas because of regulations and politics. In neighboring MN electricity rates are 10.7 cents/kW hour versus 7.6 cents/kW hour in ND because of renewable energy mandates in MN. Overall, ND has created a favorable business environment that includes a reasonable regulatory environment, low energy costs, and low taxes.

It is true that other states have kept the shale bubble flows away by lousy regulations. But the problem for ND is still one of geology and economics. The simple fact is that the average shale company is not profitable and not self financing.

As an owner of a software system integration company, I can attest firsthand to the pro-business climate in North Dakota.

In 2004, my firm was looking for a location to put its US-based development facility. We knew that in order to be cost-competitive with offshore alternatives, we had to locate in the middle of the U.S. After a five-state search, we selected North Dakota.

There really was no comparison between the other four states and North Dakota. Governor Hoeven (at that time) and his economic development team went above and beyond to convince us to locate in ND.

Their efforts included:- Escorting us to various ND cities where local realtors had prepared tours of available facilities.- Coordinating efforts between our primary software partner and the ND university system to create a specific undergraduate curriculum that fed us well prepared developers.- Providing complementary (to our internal team) recruiting assistance to help us find the best possible talent.- Putting us in touch with BTInet as a low-cost, high-quality hardware hosting option, thus minimizing our initial costs.- The list goes on.

And once we were established in ND, the governor and his team personally met with us on a monthly basis to discuss our issues. The meetings were always open, frank and action-oriented.

The efforts have led to a true win-win-win for our firm, our clients and the state. We have subsequently replicated this model in SD (another very pro-business state). We are now at over 100 consultants in each state and experiencing excellent growth (plans to add 30 consultants this year and over 100 in 2013 based on existing contracts...BTW, both the ND and SD governors met with our clients to help close the additional commitments).

What else can I say? The "Dakota Model", as we call it, works. Both ND and SD are very pro-business in my book.

Well, AIG, in fact we don't know that if you strike gold you'll be rich (as a general rule). It depends a great deal on the situation. After all, Alaska has oil but it's on a nature refuge so hands off! So many other countries that are resource-research are materially poor. For a long time, it was quite the puzzle.Look at PA and NY - PA is extracting their shale oil, and NY isn't.If ND acted like NY, they would likely have none of this growth they're experiencing. Controlling for politics, if you strike gold, you'll be rich.

North Dakota offers a model for true stimulus and recovery starting with energy exploitation It's not a model because it depends on having that energy to being with. If you happened to live in a place that doesn't have oil and gas, you can't follow that model.

Much of the business expansion in North Dakota is taking place in the neighborhood of two cities, Grand Forks and Fargo, both situated across the Red River from Minnesota. Why do you suppose a company would build a plant on the desolate, windswept prairies around Fargo rather than in the cozy environs of nearby Moorhead in contempo-socialist Minnesota? Yep, absolutely a very important factor to consider. All this growth pointed out here could be spillover into Fargo from Minnesota.

In neighboring MN electricity rates are 10.7 cents/kW hour versus 7.6 cents/kW hour in ND because of renewable energy mandates in MN That's not true. They have very different markets for the consumption of the electricity. Where you have very few populated areas, like in ND, you also get very low fluctuations in demand during a day as opposed to a place like Minneapolis. Therefore, you have to buy use electricity from different sources. Coal and hydro is sufficient for the needs of ND, but Minneapolis requires a lot more gas power plants, for example.

Their efforts included:- Escorting us to various ND cities where local realtors had prepared tours of available facilities.- Coordinating efforts between our primary software partner and the ND university system to create a specific undergraduate curriculum that fed us well prepared developers.- Providing complementary (to our internal team) recruiting assistance to help us find the best possible talent.- Putting us in touch with BTInet as a low-cost, high-quality hardware hosting option, thus minimizing our initial costs.- The list goes on. So you're saying, "subsidies" in the form of preferential treatment, state-subsidized labor force from their state university, the lack of taxation which they then pass on to the Federal government and other states to pay, is considered "pro business"?

Well, you're right. Not having any tolls on the highway because the other states can pay for it, is "pro business", but it hardly counts as "free market".

I'm getting a funny feeling in my stomach as we enter the territory where we confuse "free markets" and capitalism with government-subsidized "pro-business" cronyism where the cost is passed on to some other tax-payers in some other far away land.

, you also get very low fluctuations in demand during a day as opposed to a place like Minneapolis. Therefore, you have to buy use electricity from different sources. Coal and hydro is sufficient for the needs of ND, but Minneapolis requires a lot more gas power plants, for example.

Two train loads of coal from Wyoming arrive every day at the Sherco Generating Station in Becker, MN to satisfy the majority of the electrical demand of the central part of the state. North Dakota has some immense power houses turning low grade lignite into power. The gas-fired plants in Minnesota are latter-day conversions of obsolete coal burners like the Riverside plant in NE Minneapolis or the High Bridge plant in St. Paul, which have been for sale. Incidentally, the #3 turbine at Sherco exploded the other day and won't be in operation for some time so Xcel might be pulling some power from the gas plants, although it's not hot enough for a big AC demand yet. They usually buy a lot of power from Manitoba Hydro in the summer. The normal outage at the small nuclear plant in Monticello has been put off until Sherco #3 gets back on line, according to plant personnel.